Posted on 21 August 2012.
Stock traders that are new to trading penny stocks often do not realize how to trade penny stocks successfully. There are important differences between how to trade penny stocks and how listed stocks are traded (listed stocks are listed on major stock exchanges). While many of the trading strategies employed to trade penny stocks are similar to strategies used to trade listed stocks, there are specific penny stocks trading strategies that must be understood to trade penny stocks successfully.
The main difference between penny stocks and listed stocks trading is that penny stocks are much more news-driven than listed stocks, and the typical technical analysis and charting techniques used to find good entry and exit points in listed stock trades, often do not apply to penny stock trades. This difference between how to trade penny stocks versus listed stocks is mainly due to differences in trading volume and interest. Listed stocks usually have sufficient volume and market interest to bounce off of or hit resistance at technical levels on their charts. Whereas, penny stocks often do not have sufficient market interest to maintain support levels or hit walls of resistance, which leaves them more venerable to spikes driven by news.
The key to learning how to trade penny stocks successfully is to understand that trading penny stocks is generally short term, momentum, news-driven trading. There are a number of different trading strategies used by penny stock traders, from bottom fishing to momentum trading, but the end game is the same no matter what penny stock trading strategy is used: get in a penny stock before news sends it higher, and sell the penny stock for a profit once it rallies on news.
Successful penny stock traders learn how to sell their winners and losers at the right time. Since the earnings of penny stock companies are notoriously unpredictable, even big news that sends a penny stock soaring often is not enough to cause a sustained move higher in the stock’s long term price, and therefore, successful penny stock traders sell their penny stock winners once the momentum has ended in a penny stock news pop and move on to find the next potential wining penny stock trade.
An important aspect regarding how to trade penny stocks with success is understanding that not all penny stock trades work out as intended, and that tight stop losses should be used to limit losses from penny stock trades, so trading capital is available to make money on future winning penny stock trades. The reality is that since penny stocks are often news-driven momentum trades and since penny stocks often dilute the value of their shares over time by selling additional shares into the market, holding on to or averaging down on losing penny stock trades is usually a losing penny stock trading strategy. The best advice regarding how to trade penny stocks is to let go of losers quickly and get positioned to make profits from winning penny stock trades.
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